Update on social cost of carbon was overdue

Some in Congress have reacted strongly to the Obama administration’s recent increase of the estimated value of the “social cost of carbon[2].” House proposals[3] range from re-examining the process used to develop the estimate to barring the U.S. Environmental Protection Agency (EPA) from using the figure in developing regulations.

The social cost of carbon is one of many economic tools devised by experts and regulators to better weigh the relative costs and benefits of proposed government actions.

In its most basic sense, the social cost of carbon is the estimated economic cost of the impacts caused to society by climate change. In other words, it’s an attempt to estimate the costs associated with rising sea levels, more frequent and intense heat waves, and other climate-related consequences from increased emissions of carbon dioxide and other greenhouse gases.

The previous social cost of carbon estimates released in 2010 by a federal inter-agency workgroup were seen, by our own researchers[4] and other experts[5], as significantly underestimating the costs resulting from climate change. A more realistic estimate was long overdue.

As an example, in setting an appliance efficiency standard[9], the government must consider the costs, such as the expense of modifying the appliance to consume less energy, and the benefits, such as the reduced costs and environmental damage because less energy is being used. If that energy is produced from fossil fuels, benefits would also include reduced public health damage and costs associated with climate change.

The social cost of carbon estimates were updated with participation from 11 different government agencies, including EPA and the Department of the Treasury, and use three economic models to estimate the future impacts of carbon emissions. The model inputs include[10] impacts on “agricultural productivity, human health, property damages from increased flood risk, and the value of ecosystem services due to climate change.”

One of the critical assumptions in calculating the social cost of carbon is determining how to estimate the “time value of money” or the value of a dollar today compared with the potential value of that dollar in the future (called the discount rate).

In most circumstances, a dollar today is more valuable than one in the future since a person can put today’s dollar in the bank and get interest on it. However, when estimating the costs of climate change to future generations, the decisions are not about interest rates but rather about the economic toll of climate impacts – a rising sea level or more severe droughts – on our children and grandchildren. This assessment is partly subjective: Do we think future impacts should be valued the same as today’s?

This is a question that can’t be answered with absolute certainty. Consequently, the output of the working group is not a single estimate, but rather a range. The current analysis uses discount rates of 5, 3, and 2.5 percent, resulting in social cost of carbon estimates of $12, $43 and $65 for 2020.

For each discount rate, the new estimates are higher than the old ones. At a 3 percent discount rate, for instance, the old estimate of the social cost of carbon for 2020 was $26; the new estimate is $43. This 65 percent increase reflects a better understanding of the potential near-term and long-term impacts of climate change.

The economic costs of climate change are already being experienced and will likely be even more significant over time. Our food supply, air quality, and property are all at risk from warmer temperatures, rising seas, droughts and floods. Extreme weather events in 2012 caused more than $130 billion in damages[11], exposing our high level of vulnerability[12]. Although climate change should not be blamed for all of these events nor their cost, increasing concentrations of greenhouse gases in the atmosphere are expected to exacerbate the impacts from many types of extreme weather.

Federal regulations should provide society with the biggest possible benefits for the costs they impose. The social cost of carbon estimates enable regulators and others to weigh the costs and benefits of various efforts, helping guide us toward the most economically efficient methods to reduce carbon emissions.

While actions to reduce greenhouse gas emissions have a cost, the social cost of carbon recognizes that inaction has a cost, too.